UPDATE 2-Malaysia to impose value added tax to boost revenues

* 4 pct new tax to raise extra 1 billion ringgit

* Latest in series of economic reforms from new PM

* Political response will key

(Adds analyst, quotes, detail)

By Royce Cheah

KUALA LUMPUR, Nov 26 (Reuters) - Malaysia plans to impose a goods and services tax, likely from 2012, in a bold but potentially unpopular move to boost revenues as it faces its largest budget deficit in more than 20 years.

A top Malaysian finance official said on Thursday that the long planned goods and services tax would be set at 4 percent. The required legislation would be passed by March 2010 and the tax would be implemented 18 months after that.

Malaysia currently depends on state oil giant Petronas for more than 40 percent of its revenues and faces a budget gap of 7.4 percent of gross domestic product (GDP) this year.

It currently has just 2.3 million paying income tax, including companies, out of a population of 28 million. "I'm not sure that when the crunch comes, whether the political will would be there. This is not the first time they have wanted to propose a goods and services tax," said Citibank economist Kit Wei Zheng.

The new tax, which Second Finance Minister Husni Ahmad Hanadzlah said would replace an existing sales tax and raise an additional one billion ringgit, has been under consideration for many years but has been repeatedly shelved for political reasons.

The government that has ruled this Southeast Asian country for 52 years stumbled to its worst ever defeat in national and state elections last year and backed off economic reforms.

"If it really goes through, then yes it is a good signal of the committment to tackle fiscal problems," Kit said.

The government would exempt food staples such as rice and cooking oil from the new tax, Husni was quoted as saying by Malaysian state news agency Bernama.

The current sales tax is projected to raise 7.8 billion ringgit ($2.31 billion) in 2010 out of a total 148 billion ringgit in revenues, according to government data. [ID:nKLR305036]

INFLATIONARY PRESSURES?

Husni said he did not expect the new tax to add to inflation, although economists said that there would be an impact on prices, even though the exemptions for basic foodstuffs would result in about 20 percent of the consumer price index not being covered by the new tax.

With government support still rocky more than a year after the 2008 elections and other potentially unpopular measures such as reducing fuel and food subsidies due to come in next year, economists said there was a potential for a backlash.

"We should do it gradually. You should take baby steps. You shouldn't do it with a high rate as that could spook some people," said Bank Islam chief economist, Azrul Azwar Ahmad Tajudin.

Since taking office in April this year, Prime Minister Najib Razak has unveiled a series of economic reforms aimed at boosting Malaysia's competitiveness and recently announced plans to cut the budget deficit to 5.6 percent of GDP in 2010. [ID:nSP189242] (Additional reporting by Denny Thomas; Editing by David Chance and Kim Coghill) ((royce.cheah@thomsonreuters.com; +603 2333 8040; Reuters Messaging; royce.cheah.reuters.com@reuters.net; bureau email: areuters@gmail.com)) ($1=3.375 Malaysian Ringgit)